What it is
RSI compares the size of recent gains to recent losses, producing a bounded reading that describes the speed of a move.
How traders use it
- To gauge whether a move is stretched
- To spot divergence against price
- As a filter rather than a trigger
Worked example
Price makes a new high while RSI makes a lower high. A trend trader treats that divergence as a reason to tighten the stop, not to reverse position.
Limitations
- Stays extended for long stretches in strong trends
- Highly dependent on the lookback setting
Common mistakes
- Shorting purely because RSI is high
- Using default settings without testing them
Educational content only. TradeCaster does not provide financial advice and past results never imply future performance.